Academic journal article Management International Review

Compensation Disparity between Locals and Expatriates in China: A Multilevel Analysis of the Influence of Norms

Academic journal article Management International Review

Compensation Disparity between Locals and Expatriates in China: A Multilevel Analysis of the Influence of Norms

Article excerpt

Abstract In developing countries, there is a large gap in the compensations of locals and expatriates, which is related to negative attitudes of locals. A multilevel study was conducted in China on the influence of low compensation parity in MNC operations. Findings show that the negative effects of low compensation parity on outcome variables, namely, evaluation of and knowledge sharing with expatriates, as well as job satisfaction and intention to quit, were fully mediated by distributive justice based on a comparison with expatriates. Personal pro-disparity norm regarding low compensation parity played a buffering role and was related to a weaker relationship between compensation parity and comparative distributive justice. Organizational pro-disparity norm showed a similar cross-level buffering effect. Trust climate was related to a weaker relationship between compensation parity and comparative distributive justice, and fully mediated the moderating effect of organizational pro-disparity norm. The findings have important theoretical and managerial implications for mitigating the negative influence of low compensation parity in multinational firms, and point to some important topics for future research on the social integration of locals and expatriates.

Keywords Locals * Expatriates * Compensation disparity * Distributive justice * Norms * China

1 Introduction

Multinational corporations (MNCs) operate in many developing countries, and expatriates are often deployed in these operations. Expatriates are typically remunerated according to the compensation level of their home countries, whereas local employees are paid according to the local labor market, resulting in a large gap in compensation between these two groups. In these MNC operations, locals do compare with expatriates and report low distributive justice, (1) i.e., low perceived fairness of the compensation received as compared to the compensation of expatriates (e.g., C. C. Chen et al. 2002), which is related to negative outcomes, such as low job satisfaction (e.g., Leung et al. 1996). Indeed, this compensation gap is often a source of perceived injustice and frustration for local employees (Toh and DeNisi 2003).

To maintain cost competitiveness, it is difficult for MNCs to narrow the compensation gap significantly, and it is important to identify non-financial factors to mitigate its negative effects (C. C. Chen et al. 2002; Toh and DeNisi 2003). Managerial guidelines can then be developed to maintain the morale of local employees and promote their working relationship with expatriates. From a theoretical perspective, this line of research can unravel the dynamics underlying the negative reactions to the compensation gap between well-defined national groups, and shed light on the social integration processes within MNCs in developing countries.

The research reported in this paper attempts to develop and test a multi-level model with a focus on the mitigation of the negative influence of low compensation parity, i.e., a large compensation gap, between locals and expatriates in China. This research has two major objectives. First, we develop a theoretical model for the relationships between compensation parity, perceived justice, and locals' reactions to compensation parity. Previous studies have examined the relationship of compensation parity between locals and expatriates with perceived distributive justice (e.g., C. C. Chen et al. 2002), and of distributive justice with the reactions of local employees (e.g., Leung et al. 1996). Consistent with equity theory (Adams 1965), we develop and evaluate a mediation model in which perceived distributive justice mediates the effects of compensation parity on the reactions of locals.

The second objective is to extend previous research on mitigating the negative effects associated with low compensation parity by developing a multi-level model based on the notion of norm, defined as beliefs about the proper and appropriate behaviors and practices for a given situation (Cialdini and Trost 1998). …

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